GCE AS/A LEVEL
WJEC GCE AS/A LEVEL in
ECONOMICS
ACCREDITED BY WELSH GOVERNMENT
TEACHERS’ GUIDE
Teaching from 2015
This Welsh Government regulated qualification is not available to centres in England.
INTRODUCTION
The WJEC AS and A level Economics
qualifications, accredited by Welsh Government for
first teaching from September 2015, are available to:
• All schools and colleges in Wales
• Schools and colleges in independent regions such
as Northern Ireland, Isle of Man and the Channel
Islands
The AS will be awarded for the first time in Summer
2016, using grades A - E; the A level will be awarded
for the first time in summer 2017, using grades A*- E.
The specification offers a contemporary, principlesbased approach to the subject, encouraging learners
to develop tools to apply to a wide range of real-world
situations, rather than rely heavily on fact-based
approaches.
The structure of the content is broadly similar to the
previous WJEC specification, in that it is linear, it is
set out in three main areas of content, namely
Microeconomics, Macroeconomics and Global
economics.
Content will be assessed across four units –
AS Unit 1 Introduction to Economic Principles,
AS Unit 2 Economics in Action, A2 Unit 3
Exploring Economic Behaviour and A2 Unit 4
Evaluating Economic Models and Policies.
The focus for each unit is the nature of assessment
and not the content. This approach supports a holistic
and synoptic understanding of economic concepts
and theories, and allows learners to acquire a critical
and thoughtful approach to the study of economics,
understanding economic behaviour from a range of
perspectives and contexts.
The structure allows learners to provide extended
responses and demonstrate their ability to draw
together different areas of knowledge and
understanding from across the full course of study.
Additional ways that WJEC can offer support:
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Specimen assessment materials
Face-to-face CPD events
Examiners' reports on each question paper
Free access to past question papers and mark
schemes via the secure website
Direct access to the subject officer
Free online resources
Exam Results Analysis
Online Examination Review
AIMS OF THE TEACHERS’ GUIDE
The principal aim of the Teachers' Guide is to offer
support to teachers in delivery of the new WJEC AS
and A Level Economics specifications and
guidance as to the requirements of the qualifications
and the assessment process.
The guide is not intended as a comprehensive
reference, but as support for professional teachers
to develop stimulating and exciting courses tailored
to the needs and skills of their own students in their
particular institutions.
The guide offers assistance to teachers with
regards to possible classroom activities and links to
digital resources (both our own, freely available,
digital materials and external sources) that will be of
use and provide ideas for immersive and engaging
lessons.
The guide will concentrate on those areas new to
WJEC subject specifications and those subject
areas where guidance has been requested most.
DELIVERING THE SPECIFICATION: OVERVIEW
Background
Approach
The specification has been designed to provide a
compact discussion of the key themes in
economics. Throughout, the desire has been to
provide tools which will allow the analysis of realworld economic issues and events. When deciding
what to include and what to leave out, the tiebreaker
was always whether a concept would enhance the
understanding of the way the world works and the
way policy decisions are taken, because it is this
desire to explain economic phenomena that lies at
the heart of this specification.
The specification treats economics as a living
subject, therefore it will be important that learners
have as many opportunities to interact with
economic data and scenarios as possible.
As part of the design, there are two clear target
audiences that are catered for – one intending to
take economics further at university (the
‘specialists’) and one which is picking economics up
out of a general interest in the way the world works
(the ‘generalists’). The interests of both these
groups are at the heart of the design of this
specification.
The generalists will find that obscure topics which
have little bearing on the real world have for the
most part been omitted, except where their
presence has been required by the common core.
There is a rigorous examination of economic theory,
because only through understanding such theories
can they be effectively applied to enhance
understanding of economic events. Likewise, only if
there is a strong understanding of theory can these
theories be effectively criticised. This interplay
between economic theory, economic policy and
economic events is the central theme behind the
specification.
An approach which treats economics as a
theoretical ivory tower will not prepare learners well
for the type of questions that the specification is
designed to ask, which are focused on how well that
theory can be used to explain actual economic
events and policy decisions.
The greater emphasis that all A level specifications
now place on mathematical skills will also mean that
learners should routinely be processing, analysing,
explaining and discussing the significance of the
economic data that emerges on a daily basis on
economies around the world.
Whilst the specification is a UK one, the questions
asked will not be purely UK-centric. Issues cannot
always be explored fully using a UK context,
meaning that an approach which looks at problems
in economies from across the globe, whether
developed or developing, is likely to best prepare
learners for the requirements of the specification.
Specialists will find that the compact nature of the
specification allows greater depth of discussion and
analysis, which will allow the key principles and
ground rules of the subject to be embedded before
they go on to higher level study.
USEFUL INTERACTIVE RESOURCES
WJEC > GCE Economics > Specification from 2015
WJEC > GCE Economics > Specimen Assessment Materials
DELIVERING THE SPECIFICATION: DETAILS
Structure of the AS
Structure of the A level
The AS qualification has two papers, neither of
which are content specific. The reason for this is to
allow the subject to be treated as a whole and to
allow the linkages between macroeconomics and
microeconomics to be explored; again this is linked
to the idea of economics as a subject which aims to
explore real-world issues, many of which have
micro and macro dimensions in reality.
The full A level comprises the AS and A2 units. In
assessing the full A level it will be assumed that
learners can draw upon their knowledge and
understanding of the AS content.
Paper 3 (120 minutes, 80 marks)
The two papers also aim to test the full range of
academic skills and are designed to allow the
maximum possible exposure to practical economic
situations.
Paper 3 combines structured questions, based on
the A2 content and one compulsory data
response which covers all A level content. The
combination allows for rigorous testing of
underlying economic theory and quantitative skills
and the application of economic theory in context.
Paper 1 (75 minutes, 55 marks)
Paper 4 (150 minutes, 90 marks) involves three
Paper 1 combines multiple-choice questions (15
questions, 15 marks) with short answers (40
marks). The former allows for rigorous testing of
underlying economic theory and quantitative skills.
The latter allows the testing of these skills in a
series of applied contexts. Between the two, this
paper assesses whether learners have a strong
understanding of economic theory and an ability to
use it to analyse economic problems.
Paper 2 (120 minutes, 80 marks)
Paper 2 involves two compulsory data response
cases. These will be drawn from anywhere within
the specification and are looking to test learners’
ability to apply what they have learned to more
complex economic situations than is possible
through the short answer section. Learners will also
have to write at greater length and evaluative skills
will be at a premium – the ability to debate a case in
context and come to a well-judged conclusion is a
key skill within this paper.
essays drawn from three subsections of the
specification. There will be a choice of two essays
from each subsection and each essay will be split
into two parts. This paper is designed to test
learners’ understanding of economic theory in depth
and is drawn from the whole specification in a
structured manner.
Part (a) of each essay aims to test knowledge,
understanding and analysis, whereas part (b) is
more focused on analysis and evaluation; the use of
appropriate examples throughout this paper is likely
to illustrate learners’ understanding of the key
issues underpinning economic theory.
The sections are as follows:
Section A: Microeconomics. This covers the whole
of the microeconomics section in the A level
specification.
Section B: Macroeconomics. This covers the whole
of ‘domestic’ macroeconomics: macro theory, policy
objectives and their conflicts, in-depth
understanding of growth, unemployment,
inflation/deflation and national debt together with
fiscal, monetary and supply-side policy.
Section C: Trade and development. This covers the
whole of the Global Economics section plus
exchange rates and the balance of payments.
ASSESSMENT STRATEGY: KEY EXAMINATION COMMAND WORDS (1 OF 2)
ASSESSMENT OBJECTIVES AND THEIR RELATED COMMAND WORDS
Assessment Objective
AO1
Description
Demonstrate knowledge of
terms/concepts and theories/models to
show an understanding of the behaviour
of economic agents and how they are
affected by and respond to economic
issues.
Command words
State
Define
Identify
Name
Label
Suggest
Describe
Outline
Example questions
Which of the following is seen as an example of an
injection into the circular flow of income? [1]
A good example of an indirect tax is: [1]
Comment on the income elasticity of demand for air
travel. [2]
Outline two factors that might have caused
consumption to rise in late 2013. [4]
Summarise
Comment
What is meant
Which one (MC)
AO2
Apply knowledge and understanding to
various economic contexts to show how
economic agents are affected by and
respond to economic issues.
Apply/Use
Demonstrate
Calculate
Illustrate
Select
Show
Adapt
With reference to
Use the data to calculate annual economic growth in
2013 and 2014. [2]
Using examples from the data explain the meaning of
government failure and external costs. [4]
With reference to the data, explain why fast-food
items could be classed as 'demerit goods’. [4]
Calculate Japan’s percentage increase in GDP for the
twenty year period1990-2010. [1]
ASSESSMENT STRATEGY: KEY EXAMINATION COMMAND WORDS (2 OF 2)
ASSESSMENT OBJECTIVES AND THEIR RELATED COMMAND WORDS
Assessment Objective
Description
Command words
Example questions
AO3
Analyse issues within economics, showing
an understanding of their impact on
economic agents.
Analyse
Explain measures a country could introduce to reduce
its current account deficit. [10]
Compare/Contrast
Explain
Develop
Distinguish
Using examples, distinguish between public goods,
merit goods and demerit goods. [8]
Why might the government want to reduce CO 2
emissions from aviation? [4]
AO4
Evaluate economic arguments and use
qualitative and quantitative evidence to
support informed judgements relating to
economic issues.
Discuss
Assess
Decide
Recommend
Conclude
Assess whether transport links are the most
important economic factor in ensuring the economic
prosperity of regional areas like Cornwall. [10]
Discuss whether an increase in tariffs by the EU is
likely to be good for EU economies. [10]
Evaluate
Argue
Justify
Consider
To what extent
Do you agree
Evaluate strategies which may be used by the
government to improve the competitiveness of UK
businesses. [20]
To what extent should Chinese investment in Nigeria
be encouraged by the Nigerian Government? [10]
How important is it for the UK to cut its inflation rate
if it is to remain in the EU? [6]
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MICROECONOMICS (1 OF 4)
AREA OF STUDY
DESCRIPTION
Scarcity and Choice:
Learners should understand the concepts of scarcity, choice and
opportunity cost and how economies have to decide what, how and for
whom to produce. These concepts should be fully analysed using
production possibility frontiers.
The distinction between economic goods and free goods should also be
understood.
Demand and Supply:
Determining Price
Price Determination in Product
Markets
Knowledge of the importance of marginal utility in the derivation of
demand curves is now required (although not equi-marginal returns). This
builds upon the existing requirement of learners having an intuitive
understanding of the substitution and the income effects of a price change
(although not via indifference analysis).
Learners should also understand the importance of marginal cost in the
derivation of the supply curve.
Learners need to be able to apply the concepts of supply and demand to a
wide variety of real-world contexts to explain price and output changes.
Learners need to apply the concept of elasticity to economic contexts – for
example, in the incidence of taxation and the incidence of subsidies.
Resource Allocation:
Learners should be aware of the main assumptions upon which free
markets operate, such as a large number of buyers and sellers and perfect
information.
The emphasis is on understanding how supply and demand in a free
market allocate resources and how in theory they can do so optimally.
This will include an understanding of how perfectly competitive markets
operate within the context of the free market economy and an
understanding that free markets can only operate efficiently if perfectly
competitive markets prevail.
Learners should also understand that economic agents do not always
behave rationally.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MICROECONOMICS (2 OF 4)
AREA OF STUDY
DESCRIPTION
Labour Markets:
It is important that learners understand that wages are simply another
price and can be determined through the operation of market forces –
hence the application of supply and demand to labour. However, the free
market determination of wages is not the only factor at work in wage
determination and consideration must be given to the national minimum
wage.
Learners are expected to know the determinants of the elasticity of
demand and supply in labour markets and the factors which affect the
flexibility of labour markets such as trade union power, regulation, welfare
payments and income tax rates.
Learners should understand the links between issues in the labour market
and the supply side of the economy. Imperfections in micro labour
markets, such as the national minimum wage can be used later in the
course when looking at the macroeconomic self-stabilisation debate,
hence helping to build bridges between micro and macro.
Learners should understand the causes and implications of wage
differentials and explain the impact of migration on labour markets.
An understanding of the issues surrounding the national minimum wage is
important here.
Knowledge of marginal revenue product theory is not required but a
diagrammatic approach to labour market issues is required.
Costs, Revenues and Profits:
This area forms the underpinning of microeconomics – a good
understanding of this area casts light on a whole range of issues beyond
theory of the firm, such as derivation of the supply curve and market
failure. This area is also one of the most mathematical within the A level
so it is important that learners have a very strong understanding of both
the diagrams and calculations that are inherent within this section.
Learners should understand how short and long-run cost curves are
derived. In the short run the law of increasing and diminishing returns to a
factor should be understood numerically and diagrammatically.
It is important that learners understand clearly the difference between the
short and long run for the firm and how this can impact on business
decisions (such as shutdown), the significance for businesses of either
high fixed or variable costs and the importance for a business of any given
cost function (marginal, average fixed etc.) as well as the significance of
the distinction between normal and abnormal profit.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MICROECONOMICS (3 OF 4)
AREA OF STUDY
DESCRIPTION
Growth of Firms:
This area is an early opportunity for learners to engage with real-world
business cases to exemplify the distinctions between different forms of
expansion. Learners should be able to link this section to business
objectives in terms of motivations for growth in general and internal and
external growth in particular.
Growth of Firms
Learners should understand that firms can grow internally (organically)
through successful expansion, e.g. easyJet and Google, or externally
(inorganically) through mergers, e.g. Dixons Carphone and International
Airlines Group (IAG) which is a result of mergers between British Airways,
Iberia and BMI. Learners are required to understand the various types of
integration including backward and forward vertical and the potential costs
and benefits of such mergers.
Efficiency:
Learners need to understand the meaning of different forms of efficiency –
not just to be able to identify them on a graph; it is important that learners
can explain why a particular type of efficiency might be desirable and from
what point of view this might be true.
Learners are expected to have an awareness of dynamic efficiency and
Pareto efficiency although the main focus should be on allocative and
productive efficiency.
Business Objectives:
It is important that learners should understand why organisations might
seek to maximise profits, but what the limitations of such an objective
might be. Consequently they should understand that different types of
organisations under different sets of circumstances might pursue
alternative objectives.
Learners should understand what these alternative objectives might be
and under what circumstances an organisation might be likely to pursue
them.
Market Structure and Conduct:
Oligopoly
Monopoly
Learners are expected to distinguish between structural and behavioural
barriers to entry, for example, high start-up costs and limit pricing.
When evaluating interdependent behaviour by firms using game theory in
oligopolistic markets learners should be able to determine the Nash
equilibrium in a matrix.
Knowledge of the kinked demand curve is no longer required.
Competition Policy:
The emphasis here is on the role of competition policy – the need for it
and an assessment of the impact and the difficulties inherent within
regulation rather than an in-depth knowledge of institutional and legal
arrangements.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MICROECONOMICS (4 OF 4)
AREA OF STUDY
DESCRIPTION
Privatisation:
Although the sale of state-run organisations to private shareholders has
been an important part of privatisation since the 1980s, it is important that
learners understand that privatisation is a broader concept than this, and
that market forces can be introduced into the public sector in a wide range
of ways (prisons, hospitals, search and rescue and so on) which do not
involve the sale of assets.
Learners should also be able to evaluate the impacts of these different
forms of privatisation.
Learners should understand the arguments for renationalisation.
Quantitative Skills:
In addition to elasticities, quantitative skills could be tested by calculating
the value of both the consumer and producer surplus.
Costs and revenue calculations will also be an opportunity to test
quantitative skills.
Market Failure:
Asymmetries
Learners should be able to explain a wide range of market failures, with an
emphasis on why and in what way the market has failed, the
consequences of this failure and a discussion of the relative merits of
policies governments might implement to attempt to correct these failures.
Diagrammatically learners should be able to show the external benefits of
consumption and the external costs of production and consumption and
also be able to identify and explain welfare loss.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MACROECONOMICS (1 OF 4)
AREA OF STUDY
DESCRIPTION
General:
Learners should have an awareness of major economic issues that have
taken place since 1990 to the present day.
Links Between Income and
Consumption
Learners will not be required to calculate the multiplier nor have
knowledge of the Keynesian consumption function, the marginal efficiency
of capital nor the accelerator.
Learners are expected to be able to explain at least one factor which
causes the aggregate demand (AD) curve to slope down to the right.
Learners are expected to understand the differences between Keynesian
and Neoclassical views on what the aggregate supply (AS) curve will look
like in the long run.
Learners are expected to have an understanding of both the short and
long run Phillips Curve and aggregate supply curve with the emphasis on
inflationary expectations. Diagrammatic analysis of these theories is
required.
Learners should understand and be able to use the concept of the NAIRU
when analysing the trade-off between unemployment and inflation.
Knowledge of rational expectations theory is not required.
Learners should understand the difference between nominal and real
national income and wages.
Circular Flow of Income:
Learners should understand the importance of the circular flow model
when explaining the multiplier (although calculations of the multiplier itself
are not required).
Aggregate Demand Supply
Functions:
Learners need to have a good understanding of the key drivers of AD. A
solid understanding of the importance of and the factors influencing
consumption and investment is important.
Learners are expected to be able to explain at least one factor which
causes the aggregate demand curve to slope down to the right.
Learners should understand both the shape of the Keynesian long-run
aggregate supply curve and the neoclassical approach to short and longrun AS and should fully understand the debate over which the economy
might or might not self-stabilise following an exogenous shock.
Government Policy Objectives:
Learners should understand the reasons why governments have
attempted to achieve the key macro objectives (hence understanding what
they are) and why there may be conflicts between them.
Some learners may find it useful to incorporate the reduction of the fiscal
deficit as a contemporary policy objective.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MACROECONOMICS (2 OF 4)
AREA OF STUDY
DESCRIPTION
Economic Growth:
Learners should understand clearly the difference between actual and
potential growth. Beyond this the emphasis should be on the relative
effectiveness of policies to create growth (hence encompassing an
understanding of the factors influencing growth) and the desirability of
doing so in different circumstances.
Unemployment:
Learners should understand that the measurement of unemployment is
difficult and that a range of methodologies can be adopted. Learners need
to be able to discuss the extent to which unemployment is likely to be a
problem in different situations and to evaluate the different costs of
unemployment.
Unemployment
There needs to be an understanding that unemployment has a complex
web of underlying causes, making solutions difficult – an understanding of
the reasons for unemployment and the extent to which policies to reduce
unemployment are effective is therefore important.
Inflation/Deflation:
Inflation and Deflation
Learners need to be aware of the different ways in which inflation can be
measured and key differences between them, with the intention of
understanding the purpose of measuring inflation. From a quantitative
skills perspective, the construction of simple price indices, understanding
the role of weights in terms of calculating weighted averages is important.
Learners need to be able to evaluate effectively the costs and benefits
associated with high and low inflation and deflation and the circumstances
under which either inflation or deflation might be worrying.
Learners need to be able to evaluate the effectiveness of approaches to
combating inflation and deflation (and the reasons that tackling each can
be problematic, particularly with respect to inflationary expectations) and
as part of this will need to have an understanding of the reasons that each
might become established (hence looking at issues such as wage-price
spirals).
When looking at the quantity theory of money, an understanding and
evaluation of MV=PQ is sufficient.
Balance of Payments:
Whilst an in-depth understanding of the entire balance of payments is not
necessary, learners should understand in broad terms the composition of
the current and financial/capital accounts in terms of the sorts of items that
would be found in each and the distinction between the two.
Learners should be able to discuss the extent to which a current account
surplus or deficit is likely to be problematic and should be able to link a
surplus or deficit on the current account to the nature of the corresponding
deficit or surplus on the financial/capital account.
Should a current account deficit or surplus be deemed undesirable,
learners should be able to evaluate the relative effectiveness of policies
designed to deal with such a situation.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MACROECONOMICS (3 OF 4)
AREA OF STUDY
DESCRIPTION
Public Sector Debt:
Learners should understand that in the light of recent developments
across the world, there is a greater emphasis on the problems with
government sector deficits and debt and the extent to which these need to
be kept under control.
An ability to evaluate the extent to which a large and/or growing national
debt (and the budget deficits which contribute to this) is likely to be a
problem (and the circumstances in which problems are more or less likely
to be serious) is important, together with an understanding that national
debt is not always inherently undesirable.
Learners should be able to evaluate the different approaches to reducing
budget deficits, their relative effectiveness and the extent to which
economists from different schools of thought might be likely to recommend
different approaches.
Learners should understand the difference between structural and cyclical
fiscal (budget) deficits and also the reasons that budget deficits may arise.
Fiscal Policy:
Learners should be able to explain how Keynesian economists believe
that fiscal policy can be used to control aggregate demand in the
economy, but that fiscal policy can be used to affect both AD and AS.
An understanding of the difference between current/capital spending and
direct/indirect taxes and the impacts of changes in these on issues such
as incentives, AD/AS and the key policy objectives is important.
Monetary Policy:
Interest rates
Learners should understand the role of the Bank of England in creating
monetary and financial stability.
Learners need to have a good understanding of how interest rates are
used by central banks to control inflation and other key macro policy
objectives. In particular, an understanding both of the reasons central
banks might change interest rates and the impact of such changes (and
the timescale over which they are likely to occur) is important.
Learners are required to explain how quantitative easing is meant to work
and to evaluate the impact and risks associated with it. In addition learners
should understand that central banks may intervene directly in the banking
system via schemes such as Funding For Lending.
Detailed knowledge of different measures of the money supply is not
required.
Learners should understand the changes in the structure of the UK
economy in recent years, in particular the growing size and influence of
the financial sector.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
MACROECONOMICS (4 OF 4)
AREA OF STUDY
DESCRIPTION
Financial Stability:
Learners should understand the importance of the financial sector to the
UK economy and how regulation is needed to deal with financial crises
arising from problems such as asset bubbles. Within this, an
understanding of how asset bubbles may arise and the extent to which
they are likely to be a problem is required.
Learners are not expected to have detailed knowledge of the role of
regulators such as the Financial Policy Committee, the Prudential
Authority and the Financial Conduct Authority. As with microeconomics,
the aim here is for learners to understand the need for regulation and its
intended impact rather than in-depth knowledge of institutional
arrangements.
Supply-side Policies:
Learners should understand the importance of the long-term structural
changes that supply-side policies can bring about, and be able to illustrate
the impact on the key policy objectives using AD/AS analysis.
Learners should be able to explain and evaluate examples of specific
supply-side policies.
Exchange Rates and Policy:
Learners should understand the advantages and disadvantages of policies
which hold exchange rates artificially above or below their free market
values.
Learners should understand how quantitative easing can affect the
exchange rate and what is meant by an exchange rate index.
Learners should be able to explain the impact of changes in exchange
rates on the terms of trade.
Quantitative Skills:
Learners should be able to calculate index numbers in the context of
inflation and in other areas such as the terms of trade.
KEY ASPECTS OF THE SPECIFICATION FROM 2015
GLOBAL ECONOMICS (1 OF 1)
AREA OF STUDY
DESCRIPTION
Global Economy:
Learners should understand macroeconomic performance in a global
context and the reasons for increased economic integration between
countries as well as the importance of globalisation to trade and
development. Barriers to and solutions for sustainable economic
development should also be understood.
Life Expectancy
Theory of Trade:
Learners should be able to evaluate the arguments for and against free
trade and protectionism and as part of this should be able to show
understanding of comparative advantage diagrammatically and
numerically.
Learners should understand a range of possible protectionist measures
and should be able to illustrate and discuss the effects of tariffs
diagrammatically.
Learners should understand the UK pattern of trade and be able to
evaluate the extent to which increased global integration is beneficial to
the UK economy but also to other economies at different stages of
development. An understanding of the role and purposes of the WTO is
required, but not in-depth institutional arrangements.
European Union:
Learners should be able to distinguish between the EU and the Eurozone
and should be able to evaluate the relative costs and benefits of EU
membership from the perspective of more and less developed economies
within the existing EU as well as prospective entrants.
Learners should be able to assess the extent to which Economic and
Monetary Union in the European Union constitutes an optimal currency
area. As part of this, an understanding of the role of the ECB and the
framework within which Eurozone members have to operate is required.
Economic Development:
Characteristics of LEDCs
Learners should be able to apply the tools and concepts developed
throughout the A level in the context of less economically developed
countries (LEDCs) – an awareness that LEDCs are still economies and
have (for example) monetary and fiscal policy is important. Specifically,
learners need to understand what economic development means and the
difficulties faced when attempting to measure the level of development in
an economy.
Learners should be able to evaluate the strengths of national income
statistics and the Human Development Index (HDI) as measures of
economic development and as part of this should understand how the HDI
is calculated. Learners should have an awareness of the United Nations
Millennium Development Goals.
Learners should be able to assess the extent to which obstacles facing
LEDCs are likely to be significant and able to evaluate the effectiveness of
different approaches to overcoming these obstacles. Learners should be
able to use appropriate examples to illustrate their points throughout the
entire study of development economics.
MICROECONOMICS
EXAM LEVEL: AS/A2
AREA OF STUDY
Determining Price in Product Markets
Key Points:
• Need to introduce learners to the concepts of demand and supply, and their effect
on price in the market
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Pricing Cars
• Provide learners with photos of two cars, one very expensive (£50,000+)
and one relatively inexpensive (around £9,000).
• Ask learners to determine the factors which may contribute to high-priced
and low-priced vehicles.
• Check the learners' answers and help them to identify whether the
determined factors are supply-side or demand-side concerns e.g. the cost
of manufacture and level of technology used in the vehicle are supply-side,
but the income of the buyers is a demand factor.
USEFUL INTERACTIVE RESOURCES
WJEC Resources > Economics
WJEC > A level Economics > Specification from 2015
WJEC > A level Economics > Specimen Assessment Materials
MICROECONOMICS
EXAM LEVEL: AS/A2
AREA OF STUDY
Price Equilibrium in Product Markets
Key Points:
• Learners are required to manipulate a demand/supply diagram for a product when
ceteris paribus doesn't hold
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Determining Points of Equilibria following Changes in Demand/Supply
• Select the image (left) for an example diagram displaying the points of
equilibria for a large bottle of a cola drink.
• Provide the learners with copies of this table or a similar table of your own
choosing, this could be in the form of handouts or displaying the diagram
on the whiteboard.
• In the example diagram provided, the market for the cola is shown to be at
equilibrium at point X, where initial demand (D1) is equal to initial supply
(S1).
• The additional points, labelled A–H, relate to changes in the market for the
cola. Ask the learners to determine which of the new equilibria would
represent certain changes in demand/supply (there are a number of
example changes provided below the diagram).
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WJEC > A level Economics > Specification from 2015
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MICROECONOMICS
EXAM LEVEL: AS/A2
POINTS OF EQUILIBRIUM DIAGRAM
The following diagram displays the market for a large bottle of cola. The point of equilibrium is
currently at point X, where initial demand (D1) is equal to initial supply (S1).
Points of Equilibrium for a Bottle of Cola
Which of the labels relates to the point of equilibrium when:
1. The incomes of consumers fall due to a recession?
2. Cheaper alternatives in the soft drink market rise in price?
3. The cost of wages in the industry increases?
4. Medical science has found that soft drinks have positive benefits to health?
5. The government decides to give the producer a subsidy, because it is a major employer in the UK?
6. New technology speeds up the production of the cola?
USEFUL INTERACTIVE RESOURCES
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MICROECONOMICS
EXAM LEVEL: A LEVEL
AREA OF STUDY
Growth of Firms
Key Points:
• Learners should understand the advantages and disadvantages of mergers for a firm
• Learners should research real world data on business
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : The Purpose of Mergers
• Ask the learners to look at a number of company logos and then to match
up the companies which have merged with one another.
• Learners should identify the type of merger (vertical, horizontal etc.).
• Ask the class to begin to list the reasons why these firms are likely to have
merged, i.e. what were the benefits (e.g. economies of scale, efficiency
gains, dealing with competition, diversification). Also, see if they think of
any potential pitfalls in the mergers (job losses, less choice, diseconomies).
• Stretch activity: ask the learners to match up some of the companies with
an unusual partner (e.g. a large pharmaceutical and a comic book
franchise) and try to see if there would be any benefits in completing them.
USEFUL INTERACTIVE RESOURCES
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MICROECONOMICS
EXAM LEVEL: A LEVEL
AREA OF STUDY
Oligopoly
Key Points:
• Learners need to understand the pricing decisions of oligopolies
• Introduce learners to game theory as a way of analysing oligopoly
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : The Pricing Decisions of Oligopolies
• Select the image (left) for an example of a game theory matrix.
• Split the class into groups of three, each learner in the group represents
one firm in a three-firm oligopoly.
• Talk the learners through the game theory matrix provided (the associated
figures are fictional). They have a choice to make, to 'keep their price high'
(H) or 'lower their price' (L). However, the impact on their profit will depend
on the choices of the other two firms in the group. The pay-offs from the
various possible combinations are shown in the matrix.
• Learners should be asked to play the game a number of times, with the
aim of maximising their total profit at the end of the last game.
• Stretch activity: learners should be encouraged to work out the rational
pricing decisions in this market and then consider how it may work in reallife situations.
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MICROECONOMICS
EXAM LEVEL: A LEVEL
EXAMPLE GAME THEORY MATRIX
You have a choice to make, to 'keep your price high' (H) or 'lower your price' (L). However, the impact on your
profit will depend on the choices of the other two firms in the group.
The pay-offs from the various possible combinations are shown in the matrix below:
PRICE
COMBINATION
PRICE
DECISIONS
FIRM'S
SALES
FIRM'S
PROFIT (S)
HHH
H
3,000
800
HHL
H
2,000
200
L
6,000
1,400
H
1,000
– 400
L
5,000
1,000
L
4,000
600
HLL
LLL
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MICROECONOMICS
EXAM LEVEL: A LEVEL
AREA OF STUDY
Monopoly
Key Points:
• Learners should be aware that a monopoly is a large powerful firm
• Learners should begin to appreciate both the benefits and problems related to
monopolies
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Monopolies
• Select a clear example of a monopoly in preparation for the lesson.
• Inform learners that the business you have chosen is described as a
'monopoly', which means that it is a large dominant firm, there is no need
to elaborate further at this stage.
• Ask the learners to work in pairs and to list the potential benefits and
threats, to both consumers and the economy, of such powerful businesses.
• Learners should consider negative factors such as the lack of competition;
poor quality product/service; high prices; huge profits; ability to influence
government etc. and positive factors such as the fact that they are large
employers; big exporters; able to develop new ideas/technologies; the
chance prices could be cheaper due to economies of scale and
considering the company's social contribution.
USEFUL INTERACTIVE RESOURCES
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MICROECONOMICS
EXAM LEVEL: AS/A2
AREA OF STUDY
Asymmetries
Key Points:
• Learners should understand the definition of asymmetric information and why it can
lead to market failure
Provides an opportunity to develop the following skills:
Speaking, Listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : How Much for My Car?
• Before you have said anything about asymmetric information, have a
picture of a car on the board as learners walk into the room. For example a
picture of a guy with a ‘For Sale’ sign leaning next to his car. This should
pique the learners’ interest and they should start asking questions about
the car.
• As the class begins to pose questions, the teacher can either respond with
all-out lies or adopt an evasive approach to try and avoid the questions.
Either way, write the information on the board for all to see.
• Based on the information given, ask learners to individually value the car
(i.e. what they would be willing and able to pay for it, if they were in the
market for a second hand car). Identify who ‘bid' the most and proclaim
him/her as the buyer.
• Reveal that the car has almost no value. It is a ‘lemon’. Use this as the
launch point for the discussion on asymmetric information.
USEFUL INTERACTIVE RESOURCES
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MACROECONOMICS
EXAM LEVEL: AS/A2
AREA OF STUDY
Links between Income and Consumption
Key Points:
• Looks at how income and consumption are related
• Provides opportunities to look at extension concepts such as autonomous and
induced consumption and marginal and average propensities to consume
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : What Will You Buy at the Fair?
• Provide learners with a picture of a fairground and a list of things 'they can buy at
the fair', select the image (left) for example materials, tell them that they have
£2 and should decide what they spend their money on at the fair. Tell learners that
they visit a second time and now they have £5 to spend (they do not carry forward
any money from the previous visit), on a third visit they receive £10, fourth £20,
fifth £50 and on a final visit £100. At some stage learners should ask if they can
save any of their money and they should be allowed to do so.
• Discuss the results with the class, you should find that once the allowance rises
past £10 learners begin to save a percentage of their allowance. The greatest
amount saved should be when they have a £100 allowance. Ask learners to sketch
a relationship between income and consumption on a graph.
• Stretch activity: ask learners whether they believe the line they draw should go
through the origin. This should lead to a discussion on autonomous consumption.
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MACROECONOMICS
EXAM LEVEL: AS/A2
WHAT WILL YOU BUY AT THE FAIR?
See below for a detailed price list for each item.
Rides
Price Games
Price Food
Price
Drinks
Price
Roller coaster
£2 Coconut shy
£1 Hot dog
£2 Soft drink
50p
Ghost train
£2 Basketball
£2 Burger
£2 Milkshake
£2
Log flume
£2 Hook a duck
£1 Kebab
£5 Water
Spinning tea
cups
£2 Tombola
£1 Chips
Bungee jump
£5 Arcade
£2 Pizza
£5 Tea/coffee
£1 Ice cream
£1
£5 Candy floss
£2
Dodgems
£1.50 Air hockey
Carousel
50p Roulette
wheel
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50p Beer
free
£3.50
50p
MACROECONOMICS
EXAM LEVEL: A LEVEL
AREA OF STUDY
Unemployment
Key Points:
• Learners should understand the difference between the terms ‘labour force’ and
‘economically inactive'
• Learners should understand the different definitions of unemployment (as defined by
the Labour Force Survey (LFS) and Claimant Count)
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Unemployment Terminology and Definition
• Select the image (left) for example small case studies. Without defining
terms ask learners to split into pairs and go through each case study and
try to assess whether the person in question is (1) part of the labour force
or economically inactive and (2) employed or unemployed.
• Once complete, learners should use their results to try and generate
definitions for the terms ‘labour force’, ‘economically inactive’, ‘employed’
and ‘unemployed’.
• Learners should present their ideas to the rest of the class and you can
direct a plenary discussion.
• Stretch activity: learners could be encouraged to seek out the definitions
of unemployment from such sources as ILO (International Labour Office),
ONS (which conducts the Labour Force Survey) and HMRC. They can
compare their definitions with the ‘real’ ones.
USEFUL INTERACTIVE RESOURCES
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WJEC > A level Economics > Specification from 2015
WJEC > A level Economics > Specimen Assessment Materials
MACROECONOMICS
EXAM LEVEL: A LEVEL
UNEMPLOYMENT MINI CASE STUDIES
Darya
Darya lost her job as an architect three months ago. Every week she visits an employment agency to try to find
a new job, which she would be able to start immediately.
Charles
Charles looks after his one-year-old son. He neither holds a job, nor wants a job.
Sergey
Sergey has no job from which he receives any pay or profit. However, he helps in his parents’ shop for around
20 hours per week.
Matt
Matt is currently receiving training at a local hairdresser, which is partly paid for by the government. He works
28 hours a week and goes to college for 1 day per week.
Rosa
Rosa is out of work, but stopped looking for new jobs a year ago as she does not believe any jobs are
available.
George
George lost his job as a teacher and looks for work each week. His wife is still working in her job as an investor
banker and earns over £100k a year.
Iris
Iris has no job because she is aged 3 and busy playing with lego at home.
Charlotte
Charlotte has no job because she is at Oxford University studying Economics and Management.
Nasser
Nasser retired from his job last year and is claiming his state pension. He is still looking for part-time work.
USEFUL INTERACTIVE RESOURCES
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MACROECONOMICS
EXAM LEVEL: A LEVEL
AREA OF STUDY
Inflation and Deflation
Key Points:
• Learners should understand the variables within the MV=PY quantity theory of
money equation
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Quantity Theory of Money Simulation
• Provide learners with a clarification of the meaning of each of the terms in the
MV=PY equation.
• Select the image (left), for detailed instructions on how to run the producer
and consumer simulation.
• Stretch activity: you can change the number of banknotes in the game and
the number of commodities in order to derive different values for M, V, P and
Y.
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WJEC > A level Economics > Specification from 2015
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MACROECONOMICS
EXAM LEVEL: A LEVEL
QUANTITY THEORY OF MONEY SIMULATION
Round 1
•
Divide the class into two equal teams. If the class has 10 learners, 5 of them will play the role of
'producers' and the other 5 will be 'consumers'. Each member of the producer team is given 1
commodity (e.g. a pencil) and each member of the consumer team is given £1. Learners are instructed
to observe some rules (e.g. the consumer side must spend all of its money).
•
Allow the 2 teams to exchange commodities for money. Provided the teams obey the rules the market
price for the commodity should be £1. Ask the learners to calculate the values for M, V, P and Y (it
should be M=5, V=1, P=1 and Y=5).
Round 2
•
Provide the 5 'consumers' with £2 each, but each producer still only has 1 pencil, the market price
should jump to £2. Again ask the learners to calculate M, V, P and Y (it should be M=10, V=1, P= 2,
and Y=5).
Round 3
•
The arrangement is slightly different, but the intention is to get learners to really understand what 'V' is.
•
Split the class into 3 groups: i) consumers, ii) pencil producers and iii) mug producers. Consumers
have £1 each and are instructed to buy pencils from the producers.
•
Pencil producers will, in turn, spend their money on mugs. All producers still only have 1 item to sell.
•
Provided learners stick to the rules, the market price for pencils will be £1 and the market price for each
mug will also be £1.
•
Ask the learners to calculate the values for M, V, P and Y (it should be M=3, V=2, P=1 and Y=6).
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MACROECONOMICS
EXAM LEVEL: AS/A2
AREA OF STUDY
Monetary Policy – Interest Rates
Key Points:
• Learners should understand the basic business model of a bank
• Learners should be able to determine the current levels of interest rates
Provides an opportunity to develop the following skills:
Speaking, Listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Finding and Comparing Interest Rates
• Ask learners to visit the websites of a number of different national highstreet banks and lenders in order to determine the current interest rates
being offered on current accounts, credit cards and loans.
• Ask learners to also consider the interest rates for short-term loans from
national internet-based companies for comparison.
• Learners should be selected at random to present the basic business
models behind these banks and short-term loan lenders (i.e. how they
make a profit). A simple example may be that "the interest paid on deposits
is less than the interest received from loans".
• Stretch activity: learners should be challenged to consider why high street
banks are likely to follow the Bank of England base rate of interest, this
should lead nicely to a discussion on the transmission mechanism.
USEFUL INTERACTIVE RESOURCES
WJEC Resources > Economics
WJEC > A level Economics > Specification from 2015
WJEC > A level Economics > Specimen Assessment Materials
GLOBAL ECONOMICS
EXAM LEVEL: A LEVEL
AREA OF STUDY
Life Expectancy
Key Points:
• Learners need to understand the pricing decisions of oligopolies
• Introduce learners to game theory as a way of analysing oligopoly
Provides an opportunity to develop the following skills:
Speaking, Listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Ranking Countries
• Select the image (left) for an example of a table of countries, show the
class the list with the empty rankings space.
• Split the learners into 4 or 5 groups and ask them to list the countries
presented in the table from best to worst, in terms of life expectancy. The
groups must give reasons for their answers.
• Ask the learners to shout out their rankings and make a note of them on
the whiteboard.
• Randomly select a group and ask them to justify their ranking decisions,
ask another group who came to a different conclusion to give their
rationale.
• Show the correct ranking and actual life expectancies table to the class
and determine which group is the winner (you could deduct 1 point for each
difference in ranking for each country and the lowest score wins).
USEFUL INTERACTIVE RESOURCES
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WJEC > A level Economics > Specification from 2015
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GLOBAL ECONOMICS
EXAM LEVEL: A LEVEL
LIFE EXPECTANCY TABLE WITHOUT RANKINGS
Rank the following countries in terms of life expectancy:
COUNTRY
LIFE EXPECTANCY
RANKING
COUNTRY
?
LIFE EXPECTANCY
RANKING
?
Japan
Russia
?
Democratic Republic
of Congo
?
North Korea
?
Poland
?
Chile
?
United States
Of America
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?
Tunisia
GLOBAL ECONOMICS
EXAM LEVEL: A LEVEL
LIFE EXPECTANCY TABLE WITH RANKINGS AND AVERAGE AGES
Rank the following countries in terms of life expectancy:
COUNTRY
LIFE EXPECTANCY
RANKING
COUNTRY
1
Japan
7
(83.7)
Russia
8
North Korea
4
Poland
(76.9)
(78.8)
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(69.3)
2
Chile
3
United States
Of America
(69.2)
6
(48.9)
Democratic Republic
of Congo
LIFE EXPECTANCY
RANKING
(79.3)
5
Tunisia
(74.8)
GLOBAL ECONOMICS
EXAM LEVEL: A LEVEL
AREA OF STUDY
Characteristics of LEDCs
Key Points:
• Learners should examine the features of LEDCs
• Learners should investigate the basics of how the HDI is constructed
Provides an opportunity to develop the following skills:
Speaking, listening and understanding; Reading; Writing; Understanding numerical data;
Carrying out calculations; Interpreting results; Presenting findings; Using ICT systems;
Finding, selecting and exchanging information; Improving own learning and performance;
Developing and presenting information using ICT; Working with others – plan do and review.
INSPIRATION FOR TEACHING
Example
Activity Name : Characteristics of LEDCs
• Ask learners to examine a photograph of poverty in a LEDC (select the
image, left, for an example that can be used).
• Ask learners to make a list of the features that they consider to be
characteristic of LEDCs e.g. poor health, low income per head, poor food
supply, dependence on primary production, poor education etc.
• Ask learners to investigate the three basic aspects that the HDI uses in the
construction of its index, namely standard of living/income, life expectancy
and access to education.
USEFUL INTERACTIVE RESOURCES
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WJEC > A level Economics > Specification from 2015
WJEC > A level Economics > Specimen Assessment Materials
GLOBAL ECONOMICS
CHARACTERISTICS OF LEDCS
USEFUL INTERACTIVE RESOURCES
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EXAM LEVEL: A LEVEL
KEY TERMS AND THEIR DEFINITIONS
DEFINITIONS OF USEFUL TERMS (1 OF 5)
TERM
DESCRIPTION
Utility
Utility measures satisfaction enjoyed by a consumer when a product or service is
purchased.
Marginal utility measures the extra satisfaction gained by the consumer when one extra
unit is purchased. The marginal utility tends to decrease as consumption of a product
increases.
Diminishing
marginal
utility
For most products the demand curve slopes down from left to right, an inverse
relationship between price and quantity demanded. As the quantity consumed
increases the marginal utility falls.
If marginal utility is expressed in a monetary form the rational consumer would be
prepared to pay less for each extra unit because their need has already been partly
met. Thus, as the marginal utility falls then the price the consumer is prepared to pay
for the product also falls which explains the slope of the demand curve.
Income effect
If it is assumed that money income is fixed, the income effect of a price fall of a product
suggests that real income rises when prices fall – money income will now be able to
buy more in total and consumers increase their quantity demanded. This is because
consumers can buy more of the product with the same money income, assuming that
the product is a normal good. The reverse would occur if the product rose in price.
Substitution
effect
If the price of a product falls then it becomes cheaper relative to substitutes and thus
the quantity demanded increases. The reverse would occur if there were a rise in price.
Behavioural
economics
Traditionally, economics has assumed that people make decisions on the basis of
rationality, i.e. consumers seek to maximise utility and firms seek to maximise profits.
However, recently behavioural economics has used psychology to shed light on the
economic choices people make. Consumers can, instead of being perfectly rational, act
impulsively, be short-sighted, confused and emotional. Behavioural economics thus
explores the reasons why people sometimes make irrational decisions, and why and
how their behaviour does not follow the predictions of economic models.
Behavioural theories of the firm include Herbert Simon’s view that firms may ‘satisfice’
instead of profit maximising.
KEY TERMS AND THEIR DEFINITIONS
DEFINITIONS OF USEFUL TERMS (2 OF 5)
TERM
DESCRIPTION
The aggregate
demand curve
The aggregate demand curve slopes down from left to right. In the diagram below as
the price level falls from P1 to P2 real GDP increases. This is a movement along the
aggregate demand curve as opposed to a shift in its position which may be caused by a
rise in government spending or a cut in income tax rates.
To understand why the aggregate demand
curve slopes downwards it is important to
examine the effects of a fall in the price
level on key components of aggregate
demand – consumption, investment and
net exports.
Firstly there is the real balance (or wealth)
effect which relates to how a fall in the
price level increases the real value of
money balances giving consumers a higher
purchasing power. This will encourage
consumers to spend more increasing
aggregate demand and real GDP.
Secondly there is the interest rate effect
which relates to consumers and firms. If
there is a fall in the price level consumers need to hold less money to buy the goods
and services they want. As consumers increasingly become savers this increases the
supply of loanable funds reducing interest rates. Lower interest rates encourage firms
to borrow more to invest in new buildings and machinery. Investment is a component of
aggregate demand and real GDP increases. The trade (or exchange rate) effect links
the price level, the interest rate and the exchange rate. A fall in the price level results in
a fall in the interest rate which will lead to a fall (depreciation) in the exchange rate. A
fall in the exchange rate will make exports cheaper and imports more expensive. As a
result exports rise and imports fall leading to an increase in net exports. Net exports are
a component of aggregate demand and thus real GDP increases. It is important to
remember that the aggregate demand curve is drawn assuming all other things remain
equal, and significantly for the three explanations above it is assumed that the money
supply is fixed.
Dynamic
efficiency
Dynamic efficiency is concerned with the increase in productive efficiency of a firm over
a period of time through process and product innovation.
Joseph Schumpeter argued that large firms (possibly monopolies) which are highly
protected by high entry barriers are more likely to undertake risky innovation, and
generate dynamic efficiency.
KEY TERMS AND THEIR DEFINITIONS
DEFINITIONS OF USEFUL TERMS (3 OF 5)
TERM
DESCRIPTION
Pareto efficiency
Pareto efficiency occurs when resources are allocated in such a way that it is
impossible to make any one individual better off, without making at least one individual
worse off.
If a situation exists where resources can be reallocated and one person becomes better
off, and no one else becomes worse off, this is said to be a Pareto improvement.
Game theory
Game theory in economics is the scientific study of strategically interdependent
decision-making by firms. At its simplest a game of chess or a game of poker illustrate
game theory at work among the players.
Zero sum game
This occurs when one firm’s gain is equal to another firm’s loss. Thus the net benefit is
zero.
Dominant
strategy
Game theory involves firms devising a strategy and acting in their own self-interest. The
dominant strategy is the best strategy that a firm can follow irrespective of the
strategies followed by other firms.
Adaptive
expectations
In economics, adaptive expectations is a process by which economic agents, such as
workers, base their expectations of what will happen in the future on what has
happened in the past.
If, for example, inflation has been 3% in the past then workers will make their decisions
about how many hours to work based on this data. If inflation actually turns out to be
6% they will adapt to this new higher rate by possibly not continuing to work.
When economic agents correctly anticipate future changes to inflation this is called
rational expectations.
Structural deficit
The fiscal (budget) deficit is divided into two parts, cyclical and structural. The cyclical
part is related to the trade/business cycle and will develop during a recession when tax
revenues fall and government spending on benefits increases. In a sustained recovery
this part of the deficit will disappear as the reverse occurs.
The structural part of the deficit will remain wherever an economy is on the economic
cycle and can only be reduced by cuts in public expenditure and discretionary
increases in tax rates.
Asset bubbles
This occurs when the price of assets such as bonds, shares and property rise at such a
sustained rate they exceed the valuations justified by the fundamentals of the market in
which they operate.
Low borrowing costs, easy credit and quantitative easing can easily fuel an asset
bubble which has at its heart exaggerated expectations which are at odds with the
realities of the wider economy. The major concern with asset bubbles is that they burst
with devastating effects and demonstrate the need for effective regulation of the
financial markets.
KEY TERMS AND THEIR DEFINITIONS
DEFINITIONS OF USEFUL TERMS (4 OF 5)
TERM
DESCRIPTION
Quantitative
easing
A central bank such as the Bank of England does this by buying paper assets such as
government or corporate bonds, the money to do this is created electronically. The
institutions selling those bonds (commercial banks or other financial businesses such
as pension funds and insurance companies) will then have 'new' money in their
accounts. This can then potentially increase the money supply as this 'new' money
circulates in the economy.
The increase in demand for these bonds by the central bank will increase their price
and depress the yield – lowering long term interest rates. This 'new' money is often
invested in shares and property, raising prices in these assets too. Thus quantitative
easing leads to a rise in asset prices generally (bonds, property and shares) as well as
exercising a downward pressure on the exchange rate.
Prudential
Regulation
Authority (PRA)
The PRA supervises the safety and soundness of firms in the financial sector looking at
levels of debt, credit growth, liquidity etc. and could be directed by the FPC to adjust the
capital requirements of banks, the minimum level of capital they can hold in relation to
loans.
Financial Policy
Committee (FPC)
Since its creation by the Financial Services Act 2012 this is the main body responsible
for macroprudential policy – addressing the problems of systemic risks in the financial
system.
Twice a year the FPC produces the Financial Stability Report which covers the FPC’s
assessment of the outlook for the stability and resilience of the financial sector at the
time of the preparation of the report, and the policy actions it advises to reduce and
mitigate risks to stability.
Specifically, the FPC can recommend a given course of action to any bank, for
example, to reduce risk in the financial system. Alternatively, it can give formal
directions to the Prudential Regulation Authority and the Financial Conduct Authority.
The FPC has a secondary role of being charged with supporting the government’s
objectives of growth and employment.
Financial
Conduct
Authority (FCA)
The FCA’s role is to protect consumers of financial services from sharp practices such
as the mis-selling of financial products as was seen in the long-running problem of
Payment Protection Insurance (PPI).
The FCA tries to ensure that financial products are not over-complex thus exploiting the
information gaps of consumers. The FCA recently produced the Mortgage Market
Review which changed the way in which applications for mortgages are assessed.
The Mortgage Market Review reforms are aimed at ensuring the continued access to
mortgages for the great majority of customers who can afford it, while preventing a
return to the poor practices where mortgages were granted without proper assessment
of whether the borrowers would find the financial burden of a mortgage affordable over
the long term.
KEY TERMS AND THEIR DEFINITIONS
DEFINITIONS OF USEFUL TERMS (5 OF 5)
TERM
DESCRIPTION
Optimum
currency areas
This is an economic theory credited to Robert Mundell, in which economic efficiency
would be maximised in a geographical region if the countries all shared a single
currency.
For the group of countries to become an optimal currency area they need a high level of
trade integration; high labour mobility and real wage flexibility; a high level of capital
market integration; and not suffer asymmetric macroeconomic shocks across different
members of the single currency area.